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Alternative Basic Income Mechanisms: An Evaluation Exercise with a Microeconometric Model

  • Ugo Colombino

    ()

  • Marilena Locatelli

    ()

  • Edlira Narazani
  • Cathal O’Donoghue

We develop and estimate a microeconometric model of household labour supply in four European countries representative of different economies and welfare policy regimes: Denmark, Italy, Portugal and the United Kingdom. We then simulate, under the constraint of constant total net tax revenue (fiscal neutrality), the effects of various hypothetical tax-transfer reforms which include alternative versions of a Basic Income policy: Guaranteed Minimum Income, Work Fare, Participation Basic Income and Universal Basic Income. We produce indexes and criteria according to which the reforms can be ranked and compared to the current tax-transfer systems. The exercise can be considered as one of empirical optimal taxation, where the optimization problem is solved computationally rather than analytically. It turns out that many versions of the Basic Income policies would be superior to the current system. The most successful policies are those involving non means-tested versions of basic income (Universal or Participation Basic Income) and adopting progressive tax-rules. If – besides the fiscal neutrality constraint – also other constraints are considered, such as the implied top marginal top tax rate or the effect on female labour supply, the picture changes: unconditional policies remain optimal and feasible in Denmark and the UK; instead in Italy and Portugal universal policies appear to be too costly in terms of implied top marginal tax rates and in terms of adverse effects on female participation, and conditional policies such as Work-Fare, emerge as more desirable.

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Paper provided by CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY in its series CHILD Working Papers with number wp04_10.

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Length: 30 pages
Date of creation: Feb 2010
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Handle: RePEc:wpc:wplist:wp04_10
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  1. François Bourguignon & Amedeo Spadaro, 2006. "Microsimulation as a tool for evaluating redistribution policies," Journal of Economic Inequality, Springer, vol. 4(1), pages 77-106, April.
  2. Sen, Amartya K, 1976. "Real National Income," Review of Economic Studies, Wiley Blackwell, vol. 43(1), pages 19-39, February.
  3. Ugo Colombino & Rolf Aaberge & Tom Wennemo, 2005. "Evaluating Alternative Representations of the Choice Sets in Models of Labour Supply," Econometrics 0510001, EconWPA.
  4. Richard Blundell & Mike Brewer & Peter Haan & Andrew Shephard, 2009. "Optimal Income Taxation of Lone Mothers: An Empirical Comparison of the UK and Germany," Economic Journal, Royal Economic Society, vol. 119(535), pages F101-F121, 02.
  5. Sen, Amartya, 1974. "Informational bases of alternative welfare approaches : Aggregation and income distribution," Journal of Public Economics, Elsevier, vol. 3(4), pages 387-403, November.
  6. Colombino, Ugo, 1998. "Evaluating the effects of new telephone tariffs on residential users' demand and welfare. A model for Italy," Information Economics and Policy, Elsevier, vol. 10(3), pages 283-303, September.
  7. John Creedy & Guyonne Kalb, 2003. "Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation," Melbourne Institute Working Paper Series wp2003n16, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  8. Duncan, Alan & Giles, Christopher, 1996. "Labour Supply Incentives and Recent Family Credit Reforms," Economic Journal, Royal Economic Society, vol. 106(434), pages 142-55, January.
  9. Fortin, B. & Truchon, M., 1990. "On Reforming the Welfare System: Workfare Meets the Negative Income Tax," Cahiers de recherche 9016, Université Laval - Département d'économique.
  10. Rolf Aaberge & Ugo Colombino, 2006. "Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply," ICER Working Papers 37-2006, ICER - International Centre for Economic Research.
  11. Haan, Peter & Wrohlich, Katharina, 2007. "Optimal Taxation: The Design of Child Related Cash- and In-Kind-Benefits," IZA Discussion Papers 3128, Institute for the Study of Labor (IZA).
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  15. Aaberge, Rolf & Colombino, Ugo & Strom, Steinar, 1999. "Labour Supply in Italy: An Empirical Analysis of Joint Household Decisions, with Taxes and Quantity Constraints," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(4), pages 403-22, July-Aug..
  16. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1039-1073, August.
  17. McFadden, Daniel, 1974. "The measurement of urban travel demand," Journal of Public Economics, Elsevier, vol. 3(4), pages 303-328, November.
  18. Rolf Aaberge, 2007. "Gini’s nuclear family," Journal of Economic Inequality, Springer, vol. 5(3), pages 305-322, December.
  19. Roed, Knut & Strom, Steinar, 2002. " Progressive Taxes and the Labour Market: Is the Trade-Off between Equality and Efficiency Inevitable?," Journal of Economic Surveys, Wiley Blackwell, vol. 16(1), pages 77-110, February.
  20. Meade, James E, 1972. "Poverty in the Welfare State," Oxford Economic Papers, Oxford University Press, vol. 24(3), pages 289-326, November.
  21. Standing Guy, 2008. "How Cash Transfers Promote the Case for Basic Income," Basic Income Studies, De Gruyter, vol. 3(1), pages 1-30, July.
  22. Ricardo Varsano & Kevin Kim & Michael Keen, 2006. "The "Flat Tax(es)"; Principles and Evidence," IMF Working Papers 06/218, International Monetary Fund.
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